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Geithner’s View of the Economy is Not Reality

Former New York Fed President and Treasury Secretary Tim Geithner protected us and the economy (at least, according to him).

All hail Tim Geithner! Or not. Someone should tell Mr. Geithner that it’s just a bit too soon to rewrite history.

While the bailouts and handouts he guided through the economy are now five to six years in the past, many of us still remember them, and we don’t regard them fondly.

But Geithner’s on a mission: to sell books and burnish his image. I guess being thought of as one of the main guys who forked over billions of taxpayer dollars to bankers and corporate ne’er-do-wells isn’t meshing with his career as the leader of a private capital firm, Warburg Pincus.

So he’s taken to the airwaves and pages to set the record straight… or should I say, adjust the record to his view.

His Economy and Reality are Strangers

In The Wall Street Journal on May 13, 2014, Geithner pointed out the possibility of utter collapse that hung over the financial system in late 2008, and how that eventuality was avoided only because of the extraordinary measures he, then-Treasury Secretary Hank Paulson, and then-Fed Chairman Ben Bernanke took.

Without their heroic efforts, we were well on the way to a repeat of the worst parts of the Great Depression: shantytowns, soup lines, and a severe retrenchment in the banking system brought on by bank runs.

This ignores just a few things…

We did away with soup lines and shantytowns by instituting unemployment insurance, which put the checks in the mail. States handle this system, but it was supplemented by federal laws that extended benefits from 27 weeks up to 99 weeks in the hardest-hit areas.

As for bank runs, that’s what deposit insurance is for, and it works. While there is a conversation to be had about the efficacy of deposit insurance (does it motivate banks to be as risky as the laws allow?), it’s evident that depositors weren’t running for the doors, even as banks went under, because by and large they knew their money would be available at the end of the day.

Bailing out poorly managed banks did nothing to address either of these situations, no matter what Mr. Geithner claims.

His main point in the article is that, in times of crisis, regulators have to do what is wildly unpopular to save the system so that the innocent victims can be rescued.

Hmm…

The reason the bailouts were so unpopular, and remain so today, is because the efforts didn’t rescue the little guy. Wiping out the stock and bondholders of Citigroup, Bank of America, and Bear Stearns would have been painful for some, but certainly not a catastrophe for all.

So instead, we not only left the bad companies standing, but we left the bad actors in charge, and handed them billions of dollars. Now the world knows that if anything happens to shock the financial system, the U.S. government will come running with a bucket of taxpayer cash to put out the fire.

This moral hazard — where one profits when things are good but doesn’t suffer when things are bad — is alive and well, witnessed by the fact that the worst offenders have some of the lowest borrowing costs when taking on new debt, and their stock prices are dramatically higher. Why not invest in them? They’ll never suffer!

It’s been said that the financial crisis was a depression headed for Wall Street, not Main Street. That’s not entirely true.

While Wall Street would have (and should have, in many regards) suffered more if the financial institutions had been allowed to implode, there was still a deflating housing and property bubble that swept across the nation.

What’s so frustrating about the way the crisis was handled — in particular, by Mr. Geithner and his partners in crime — is that they singled out for saving the exact people and firms that had created much of the crisis!

We would be much better off today if the main thrust of the downturn had been allowed to take its course, ring-fencing depositors in banking institutions and letting the rest of the chips fall where they may.

The drop would have been deeper, but the rebound would have been on more solid footing, with lending institutions and investment banks clear on what the word “risk” actually means.

Thanks to Tim Geithner, in financial circles, this word means: “What we hand off to taxpayers in times of trouble.”

Rodney

P.S. For those keeping track at home, you’ll find the name “Warburg” (where Geithner now works) familiar. Paul Warburg was instrumental in creating the Federal Reserve in the early 1900s, and was appointed Vice Governor of the institution in 1914. It seems only fitting that Mr. Geithner would end up there.

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Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.